Newsletter Issue 144 | October 2020

Amendments to the Tax Code in 2020: The “BEPS law”

The “BEPS law” containing changes to the Tax Code of Ukraine came into force in May of this year. This law implements anti-tax-avoidance and tax transparency measures recommended by the OECD’s BEPS project to combat tax base erosion and profit shifting. Important changes combat tax-avoidance schemes that exploit loopholes in double-taxation agreements with complex international constructions and unregistered permanent establishments. The law also contains general changes to improve the tax system.

The changes constitute an important step ahead towards strengthening Ukraine’s tax receipts and improving the business environment. Whilst companies will benefit from many fixes to existing problems in the tax system, the use of complex international tax avoidance schemes will be significantly discouraged. The law also represents a much-needed shift in the philosophy of tax administration from “form over substance” to “substance over form”. For this shift to translate from legislation to actual practice, however, implementation will play a key role and solid training of tax authorities’ staff will be required.


Newsletter Issue 143 | September 2020

German FDI in Ukraine: A valuation issue

According to the Ukrainian National Statistics Office, German foreign direct investment (FDI) in Ukraine has considerably dropped since 2011. This is a remarkable development, as economic ties between the two countries have generally increased, particularly due to Ukraine’s EU association.

Indeed, the negative development in the data is caused by a few specific reasons. The data are strongly driven by one large individual investment by the German subsidiary of a global steel corporation with Indian majority shareholders. This shows that bilateral FDI statistics should be interpreted cautiously. In addition, the valuation method employed for this investment plays a key role. In sum, one should not come to rash conclusions on the relations between the Ukrainian and German economies based solely on Ukrainian FDI data.


Newsletter Issue 142 | August 2020

Key trends in Ukraine’s banking sector

Ukraine’s banking sector has undergone a process of deep and comprehensive reforms over the last few years. As a result, the number of banks dropped significantly to 74 currently, down from 180 in 2013. Bank assets have somewhat increased, but slower than Ukraine’s nominal GDP. Therefore, the banking sector (21% of GDP) declined and remains small in regional comparison. The banking clean-up involved the nationalisation of Privatbank, the market leader with a 28% asset share, and led to the dominance of state-owned banks, representing 59% of the market. The reforms also contributed to improving the capital adequacy ratio, thereby strengthening resilience and supported profitability of the sector. As a result, Ukraine’s banks are facing the negative economic consequences of the COVID-19 pandemic much better prepared than in the past.

Still, the amount of non-performing loans remains a risk. Though the share has gradually declined since 2017, it remains on a very high level compared to peers. Ensuring a significant reduction of the NPL stock and maintaining the independence of the National Bank are two key priorities within the current IMF Stand-By-Arrangement.


Newsletter Issue 141 | July 2020

The German EU Presidency and Implications for Ukraine

Ukraine’s special relations with Germany, both as an economic partner and also as a key actor in the talks on the Donbas conflict within the Normandy Format have set its expectations high from Germany’s EU Presidency. But do they match Germany’s priorities for the next six months? In few instances they do, but not in many. An overly ambitious German agenda means less focus on Ukraine’s key challenges – fighting the war in Donbas and recovering its economy in the aftermath of the COVID-19 pandemic.


Newsletter Issue 140 | June 2020

Land market: how much light do we see at the end?

In March 2020, the Ukrainian Parliament made a revolutionary step and brought to the end the 20-year long moratorium on agricultural land sales. The Law on Amendments to Legislative Acts on Turnover of Agricultural Land (552-IX) was finally adopted. Ukraine effectively completes the land reform, which transformed the Soviet-era state land into truly private property with all corresponding rights. Despite the importance of this step, we keep hearing voices from both sides of the land reform camp that the adopted law will make no good to Ukraine. To assess if such statements have any justice, we highlight the key features of the law, the benefits and losses to the key stakeholders and steps that remain to be taken to realize the full potential of the agricultural land as a driver of sustainable growth in Ukraine.


Economic Monitor Issue 12 | June 2020


  • GDP: Due to COVID-19, the Ukrainian economy is forecast to decline by 7.0% in 2020, followed by a small growth of 1.1% in 2021
  • The significant decline of GDP is a combination of domestic lockdown measures as well as a deterioration in the global environment
  • Due to significant progress with macroeconomic stability during recent years, Ukraine faces this global crisis much better prepared than in the past
  • A flexible exchange rate acts as a shock absorber and protects international reserves (Jun-20: USD 25.4 bn)v
  • The current account will almost be balanced in 2020 (-0.3% of GDP), as imports shrink faster than exports
  • But: lower FDI and reversal of private capital inflows create problems for financing the current account deficit
  • Low inflation (May-20: 1.7%) allowed the NBU to decrease the policy rate, supporting the economy
  • Public finances: after years of moderate deficits, the budget deficit is set to rise to 7.5% of GDP in 2020 as a result of the crisis

Newsletter Issue 139 | May 2020

Covid-19 leads to sharp contraction of Ukraine’s economy

The Covid-19 pandemic has taken a firm grip on the world economy. Ukraine will unfortunately not escape this global trend. A scenario-based analysis by the German Economic Team shows both the direct shocks and the total economic effect of the Covid-19 pandemic on Ukraine. Direct shocks include the temporary closure of domestic sectors, shocks to goods and services exports of Ukraine and a drop of remittances income.


Newsletter Issue 138 | April 2020

Why an IMF programme is urgently needed

In December 2019, Ukraine reached a staff level agreement with the IMF on a 3-year extended fund facility (EFF). The agreement was supposed to unlock a USD 5.5 bn programme, conditioned on the fulfilment of a set of prior actions. Notwithstanding last year’s rather favourable macroeconomic dynamics, the IMF programme was considered as an important tool for anchoring structural reforms and facilitating further support by the EU and the World Bank.


Newsletter Issue 137 | March 2020

Ukraine’s foreign trade in 2019

Ukraine’s foreign trade continued to grow in 2019, exports and imports of goods expanded both by 6%. The trade deficit amounted to USD 11 bn. This corresponds to 7.1% of GDP, which is lower than in the previous year. Economic growth and hryvnia appreciation were the main reasons for this reduction.


Newsletter Issue 136 | February 2020

Ukraine’s economy in good shape

Ukraine emerges from 2019 in a stable economic shape. GDP growth was at 3.5%, driven by strong domestic demand, despite two elections being held in 2019. Due to strong inflow of foreign capital to the domestic bond market, the Hryvnia appreciated by 16% against the US dollar. Inflation was at 4.1% and thus for the first time within the National Bank’s target range, allowing a gradual reduction of the policy rate. Both the current account and budget deficits are under control at ca. 3% and 2% of GDP, respectively.


Economic Monitor Issue 11 | January 2020


  • Labour migration. Increasing migration supports growth in real wages.
  • Reform agenda of the government. Ambitious economic policy goals require comprehensive reforms
  • IMF programme. New agreement is a positive signal and supports the reform agenda
  • Reform proposals of German business in Ukraine. Update of our study shows progress in improving the investment climate
  • Gas transit deal. Agreement between Naftogaz and Gazprom on gas transit is a positive development

Newsletter Edition 135 | January 2020

The new Russia-Ukraine gas agreements

Gas negotiations between Russia and Ukraine were ultimately successful: a package of agreements has been reached which allow Russian gas to be transported through Ukraine for five years at a roughly 50% level compared to average volumes of the past five years. Enabling factors included the successful unbundling process of Naftogaz in a race against time, Ukraine’s focus on achieving short-term gains, Russia’s willingness to bend to the Stockholm arbitration awards payment. With sanctions from the United States on Nord Stream 2, Russia was plunged into uncertainty over the opening of this alternative route and compelled to secure a longer and larger deal with Ukraine than it initially considered. Next issues to watch for are two remaining legal disputes, Gazprom’s possible direct gas supplies to Ukraine, and the fate of the Yamal-Europe transit pipeline.


Newsletter Edition 134 | December 2019

Labour migration from Ukraine: A mixed blessing

Significant changes in patterns of labour migration from Ukraine have occurred since 2014. There has been a direction change of migrant streams from East to West and an overall increase of labour migration. The total number of labour migrants from Ukraine in the beginning of 2017 was at least 2 million. Out of these, at least 500,000 were in Poland and a further increase of this migrant stock by 200,000 migrants per year in 2017 and 2018 appears credible. Remittances of labour migrants amounted to ca. USD 11 bn in 2018, around 8% of GDP.


Newsletter Edition 133 | November 2019

The new government plan: It’s not the destination, it’s the journey

Ukraine’s new government has recently unveiled its 5-year Action Programme, which sets its priorities in the economic and social sphere. While some targets like obtaining USD 50 bn of FDI inflows or reaching a foreign credit of “A-“ look (over-)ambitious, other targets like the reduction of the public debt to GDP or the diversification of borrowing into local currency look quite realistic. It is also very positive that budget planning is done with a conservative approach. Regardless of the ultimate achievement of all indicators, the focus should be on the implementation of key reforms underlying this programme.


Newsletter Edition 132 | October 2019

New trade barriers in the steel market: Limited impact on Ukraine

Following the introduction of an additional 25% customs duty on selected steel imports by the USA in 2018, the EU and other markets responded by imposing their own safeguard measures. Especially the measures of the USA and EU matter for Ukraine: While the EU is Ukraine’s primary destination market for steel products with a share of 38% of steel exports, the USA are the third most important market, with a share of 8%. Steel remains a key export good of Ukraine, accounting for 23% of total goods exports in 2018.


Newsletter Edition 131 | September 2019

Banking sector recovery continues, but risks remain

Banks operating in Ukraine have considerably improved their performance during the last few years. While the sector as a whole recorded a record loss of UAH 160.5 bn in 2016 (after the nationalisation of PrivatBank, the biggest bank in the country), the corresponding figure for the first eight months in 2019 is a profit of UAH 44 bn, also in part due to a turn-around in PrivatBank.


Policy Paper 03/2019

Modern Monetary Theory: Background and implications for emerging markets

Modern Monetary Theory (MMT) is an increasingly debated economic concept. While mainly brought into the current public discussion by politicians in the US, the concept does have some hetherodox theoretical foundations, which date back to the beginning of the 20th century.

The theory claims that budget deficits can be financed by the central bank creating thereby fiscal space, whereby the monetisation of debt is not an issue of concern, as long it does not lead to high inflation. In the current discussion, the proponents foresee the potential for a massive increase in public investments (be it for a “New Green Deal” or a “Job Guarantee Programme”), essentially without creating any harm, as inflation and interest rates are considered to be at very low levels for a very long time in developed markets.


Policy Paper 02/2019

Reforming the law “On Prices” in Ukraine: Analysis and recommendations

Price controls describe all regulations directly regulating the price setting by the suppliers of goods and services on markets. They usually take the form of either direct setting of prices (or maximum/minimum thresholds) by government or of limits on the profitability margin or cost markups of goods. They form a part of a wider toolkit for governments to affect market outcomes, including competition policy, producer or product standards, direct market interventions by the state, taxes, subsidies and social transfers.


Newsletter Issue No. 129 | July 2019

Electricity market opening – still work to do

Ukraine’s electricity wholesale market has been opened for competition on 1st of July. In theory, large retail suppliers and industrial consumers can now buy electricity freely from different generators on the open market. Hopes are that this will lead to a more efficient electricity sector. However, despite two years of preparation, there are concerns that the sector is
not yet ready for the opening.


Newsletter Issue No. 128 | June 2019

Positive effect of the DCFTA on Ukraine’s exports to the EU

Ukraine and the EU concluded a deep and comprehensive free trade agreement (DCFTA) in 2014. In a recent comparative study, which also includes Georgia and Moldova, we look at the effect of the DCFTA on
Ukrainian exports to the EU.


Newsletter Issue No. 127 | May 2019

Reforming the support scheme for renewables in Ukraine

The expansion of renewable energy in Ukraine has recently gained momentum. This development has been fostered by a generous feed-in tariff for producers of “green” electricity which is guaranteed by the state. However, this feed-in tariff has caused high costs and therefore made a reform of the support scheme inevitable. With the introduction of an
auction system, the development of renewable energy shall – in line with the international trend – become more competitive, controllable and costeffective.


Newsletter Issue No. 126 | April 2019

Losses in EU trade due to a shortage of transport permits for trucks

Almost 40% of the value of Ukraine’s exports to the EU in 2018 was transported by trucks. At the same time, Ukrainian road carriers experienced a shortage of transport permits for key EU countries. Transport
permits for Ukrainian trucks to operate in several EU countries ran out before the end of 2018. Most strongly affected were permits for Poland. Noticeable shortages at the end of 2018 also affected permits for
Germany, Austria and Slovakia.


Policy Paper 01/2019

Central Bank Digital Currencies: A Survey of the Key Issues

Central bank digital currency (CBDC) is currently a hot topic, discussed in a significant number of central banks as well as in academic circles. As can be expected, there is no clear-cut definition of CBDC. Rather, there are different variants of CBDC being in discussion with mainly one feature in common: It is digital money issued by the central bank. For the purpose of this paper, we focus on CBDC on an account basis that is available for the general public. Thus, in this paper, CBDC is synonym for digital money deposited at the central bank, with every adult being entitled to hold such an account, without any limit to swap deposits against CBDC.


Newsletter Issue No. 125 | March 2019

Currency liberalization in Ukraine: a fundamental step forward

Since February 7, 2019, the new Law on Currency has taken effect. It shifts the authority on certain capital flow restrictions from the level of Parliament to the level of regulatory acts issued by the National Bank of
Ukraine. In contrast to the previous post-Soviet spirit of strict capital controls, the new law is based on the fundamental principle: “Everything which is not specifically forbidden is allowed”.


Newsletter Issue No. 124 | February 2019

Ukraine’s upcoming presidential elections

The electoral campaign for the upcoming Ukrainian presidential elections on 31 March is now in full swing. Amidst difficult reforms that do not deliver on citizens’ expectations of the Euromaidan protests, and a
military conflict with Russia in Eastern Ukraine, candidates look for new ways to convince a weary and undecided electorate that immediate progress is still feasible. The contenders’ views on conflict settlement
and corruption will likely determine their odds at winning the presidency. The overall outcome, however, is highly unpredictable. Domestic elites as
well as external actors may take advantage of the mood swings of Ukrainian citizens and the weak state institutions to sway election results in their favour.


Newsletter Issue No. 123 | January 2019

IMF programme supports stable economic outlook

The cooperation with the IMF, which was resumed at the end of last year, has already borne fruit. Inflation is slowly declining; foreign exchange reserves have reached a multi-year high and public finances contin-ue to consolidate. The macroeconomic and financial situation is therefore stable, which is not a given in the light of the upcoming elections and a rather vola-tile global environment. Given the high external pub-lic debt interest and principal payments schedules for the current and upcoming year (USD 13.3 bn), there is no alternative to the cooperation with the IMF.


Newsletter Issue No. 122 | December 2018

Challenges to agricultural budget support policy

Over the last years, Ukraine’s agri-food sector demon-strated resilient growth and developed into a key source of foreign exchange for the economy. In 2017, it accounted for 14.5% of GDP and more than 42% of total goods exports. This positive development came against a significant reduction in the volume of agri-cultural budget support over the recent years. The structure of the support also changed, moving from tax benefits to direct support in the form of input sub-sidies. However, the way the direct support pro-grammes are designed and implemented, as well as the negative effects of input subsidies on efficiency and productivity, raise serious concerns about their sustainability and effectiveness. A more targeted and modern approach is needed in order to address the current major problems of the sector (shortage of workers and financial constraints) under severe fiscal constraints facing the country.


Newsletter Issue No. 121 | November 2018

The new IMF agreement: all good things come in threes

Ukraine has recently reached an agreement with the IMF on the continuation of the financial cooperation. Although the final decision by the IMF Executive Board is still outstanding, this would be the third programme since 2014. A smooth implementation of the USD 14.9 bn programme over the coming 14 months would be an important anchor for the macro-financial stability of Ukraine in the double election year 2019. Particularly in the context of further financial support by the EU and World Bank, the external public debt service would be made much easier.


Newsletter Issue No. 120 | October 2018

Reform proposals for improvement of the investment climate

After overcoming the economic crisis of 2014/15, Ukraine is back on course for growth. However, to give their citizens a real perspective, higher growth rates are needed and more investment is a key prerequisite.


Newsletter Issue No. 119 | September 2018

Decentralisation reform in Ukraine

Since 2014, the Ukrainian government has initiated extensive reforms. While some reform projects have stalled recently, the comprehensive decentralisation reform is considered one of the most successful and
dynamic reforms in Ukraine, despite challenges and difficulties. It has already changed the reality of many people’s lives outside the capital Kyiv. In the last four years, the reorganization of the municipalities has
been driven forward and competencies and resources have been transferred from the central state to the local level. The decentralisation reform is supported by Ukraine’s Western partners, above all the EU and Germany. Despite successes, however, there is still a long way to go before the reform is completed.


Newsletter Issue No. 118 | August 2018

Ukraine’s exports grow, driven by shipments to the EU

Ukraine’s exports continue to grow for the second year in a row, although at a somewhat slower pace than in 2017. The growth has been driven primarily by strong expansion of exports to the EU, where the DCFTA has been fully enacted since September 2017, although actual implementation started earlier.


Newsletter Issue No. 117 | July 2018

Economic outlook: growth continues, but fiscal risks remain

Ukraine’s economic growth is slightly accelerating: after growing by 2.5% in 2017, real GDP is forecast to increase by 3.2% this year and 3.3% in 2019. The demand-side drivers are investment and consumption, with most sectors on the supply side growing as well. Inflation continues to run above the National Bank’s inflation target and is forecast at 9% at the end of 2018. This has led to hikes in the policy rate, which currently amounts to 17.5%. In all likelihood, inflation will only return to the target band set by the National Bank at the end of next year.


Newsletter Issue No. 116 | June 2018

Anti-corruption reforms in Ukraine: progress or lack thereof?

During four years of anti-corruption reforms, a number of institutions were established to tackle the problem at different levels. New state bodies provide the infrastructure for investigation and prosecution of criminal cases, for monitoring, guidance and surveillance of implementation of anti-corruption measures, and administration of confiscated assets.


Newsletter Issue No. 115 | May 2018

Economic effect of foreign direct investment in Ukraine

Recent research by the German Advisory Group shows that foreign direct investment (FDI) strongly benefits Ukraine. FDI companies, which are at least 10% owned by a foreign investor, make up only 4.6% of companies in Ukraine. Yet these relatively few FDI companies account for over 20% of employees, own 24% of the total capital stock of Ukraine and produce almost 35% of total gross value added, a measure of output. Hence, FDI companies are not only much larger than purely domestically owned companies; they are also significantly more productive. The economic benefits of FDI to Ukraine are therefore large, despite the hit that the value of the FDI stock has taken in recent years due to difficult economic circumstances.


Newsletter Issue No. 114 | April 2018

Renewed Naftogaz-Gazprom tensions after Stockholm arbitration

The recent awards in the Stockholm arbitration dispute between Naftogaz and Gazprom turned Naftogaz into a net winner of about USD 2.6 bn. Yet there are renewed tensions over their enforcement and risks for European gas supplies in January 2020. Gazprom must show reasonable and responsible behaviour while Naftogaz and Ukraine must pursue their reforms and refrain from using the transit tariff negotiations as a way to maintain the status quo.


Newsletter Issue No. 113 | March 2018

Tax on Withdrawn Capital: Economic and fiscal effects

Introduction of a Tax on Withdrawn Capital would be a fundamental change of Ukraine’s corporate tax system. The proposed tax is an internationally unusual corporate tax based on profit distributions
rather than on the financial profits of companies. Although the effect on investment in the short run is likely to be limited, the new tax has potential to improve business climate in the long run. Fiscally, introduction of the new tax will lead to a significant annual fiscal shortfall of 1.2% to 1.5% of GDP in the first years following the tax reform, which should be fully compensated in the budget. Also, the potential for improvement of the business climate can only be realised if the tax reform is combined with a
substantial reform and improvement of the tax authority.


Newsletter Issue No. 112 | February 2018

Economic outlook Ukraine: Higher growth to be expected

Last year the Ukrainian economy expanded by 2.2%, in spite of the trade suspension with the noncontrolled area in the East, which dampened growth by ca. 0.9%. Except for inflation, which exceeded the National Bank’s target, macroeconomic indicators performed rather well. Especially the fact that fiscal consolidation is bearing its first fruits and led to a
decrease in the public debt-to-GDP ratio for the first time since several years is to be highlighted: This indicator decreased from more than 81% of GDP to 73%.


Newsletter Issue No. 111 | January 2018

Ukraine’s reform performance and latest developments

Since 2014, Ukraine has conducted key policy reforms. This is particularly the case for the banking and energy sectors, as well as for the state budget.
Despite the significant success that has been reached, the overall reform performance is mixed. Neither the judicial system, nor customs authorities or parts of the tax administration – all being central determinants of the business climate – have so far undergone thorough reform; also privatisation is not gaining momentum.